Trusts & Wills

Trusts & Wills

Why create a Revocable Trust?

Avoid lengthy, expensive and public probate

Control who will manage your affairs if you cannot

Protect your assets from estate tax

What is a Trust?

A Trust is a planning technique that offers benefits to virtually all Californians. It is particularly appropriate for individuals who are older or who have substantial assets. If you own a home in California, a living trust makes sense for you.

In a very real sense, a Living Trust is a new being. It will hold your property while you are living, and it will continue in existence after your death.

Who Manages the Trust?

You do, or the person of your choice may do so. In creating a Living Trust, you do not give up management and control of your assets. The assets and income are used for your personal benefit, or for the benefit of any other person or persons you name as beneficiaries.

What are the Benefits of a Trust?

Avoid Probate, Save Time and MoneyProbate is a process whereby a court of law oversees the distribution of an estate upon a person's death. It can be very time-consuming -- taking up to two or three years in many cases -- and expensive because of attorney and other fees. For example, the probate costs for a $500,000 estate, which includes the value of a home, can be as much as $25,000.

Avoid ConservatorshipA Living Trust is especially important for a person who may lose capacity to make his own decisions. If no advance planning is done, a conservatorship may be required. In a conservatorship, a court appoints a person to make decisions and act or the individual who is unable to manage his personal or financial affairs.Obtaining a conservatorship can be expensive, and there is ongoing supervision by the court. While a conservatorship can be healthy and protective in appropriate cases, it can as readily be unnecessarily intrusive and costly. A Living Trust can avoid the need for a conservatorship in most cases. It can name someone to manage the trust if and when the person can no longer do so.In other words, you can create your own mechanism for substituted control and management of your affairs without intervention by any other person or the court. You choose the person(s), and you can even include specific instructions about how the assets are to be managed.

PrivacyWhile probate proceedings and records are open to the public, and anyone can look at the details of your estate and distribution plan, the terms of a trust are private.

"Test" a TrusteeIf you like, you can name a person to manage the trust while you have full capacity and let her (or him) manage it for a test period, such as six months or a year. If the person does a good job, you let her continue. If she does not, you take over or replace her with another individual.This is another illustration of how a Living Trust can help you retain as much control as possible over your assets, your personal security, and your future.

How Do You Create a Living Trust?A Trust document -- such as the "John and Mary Smith Trust Agreement" -- is prepared. It specifies the beneficiaries of the trust, the managers of the trust, and numerous other things such as distribution of the assets upon the death of the first beneficiaries.

The Trust document is signed, and assets are transferred into the Trust. For example, the family home would be put into the name of "John and Mary Smith, Trustees for the John and Mary Smith Trust." Bank accounts and other assets would be similarly transferred.

Significantly, John and Mary Smith, as Trustees, can have the same amount of control over their money and other assets as they did without the Trust. The form of ownership changes, and John and Mary Smith will have specifically provided for their own and their family's future needs.

They will have retained control, preserved it in the event of incapacity, likely saved money, and avoided time-consuming inconveniences for their family.

Other Considerations:

It is emphasized that a Living Trust is a serious and comprehensive planning document. This summary is designed to acquaint you with many highlights of the Living Trust rather than be exhaustive. It does not, for example, explore tax and estate planning issues that are also important considerations when planning the provisions of a Living Trust.

What happens if you don't have a Trust?

Intestate Succession: California's laws of Intestate Succession is your "default" estate plan. It's the law that says who gets what when someone dies without a will. Here are a few examples of how it works: Decedent was single with no children, in order of priority:

Parents, in equal shares Brothers and Sisters, in equal shares. If a sibling died first, leaving children, then those children will take that sibling's share. Grandparents, in equal shares, or their issue (aunts, uncles, cousins, etc.) Decedent was married with no children: Spouse gets all community property and one-half of the separate property. The other half of the separate property passes to the decedent's parents, brothers, sisters, etc. just as if there was no surviving spouse. Decedent was married with children: Spouse gets all community property and either one-half of the separate property (if there is only one child) or one-third of the separate property (if there are two or more children) The children get the rest. The idea behind all this is that our laws of intestate succession are the legislature's best guess about what most people would want to do with their assets when they die. The State of California will not take everything if you die without a will, unless it's Hamlet Act IV, and there's essentially no one left alive in your family to inherit your property. If that's the case, and there is no one to inherit your property, only then will your estate be turned over to the State of California.

New rights for registered domestic partners:As of July 1, 2003, the registered domestic partner of a deceased person is entitled to essentially the same intestate succession rights as a surviving spouse (either 1/3 or 1/2 of the deceased partner's separate property). You MUST be domestic partners registered with the California Secretary of State to qualify for a domestic partner's succession rights. Local domestic partner registration provided by some cities does not qualify. To register, or or both partners must be age 62 or older, or the domestic partnership must be a same-sex couple. The registration form is available online with the California Secretary of State.

Wills:

A will is, simply put, a letter to the judge saying what you want done with your assets after your death. There are two types of wills that are valid in California, attested wills and holographic wills.

Attested Wills: Attested, or witnessed wills are valid in California if they are signed before two disinterested witnesses who will not inherit any portion of your estate after your death. Witnesses must also be age 18 or older.

Holographic Wills: If you want, you can make your own simple holographic (handwritten) will by writing out your wishes on a sheet of paper. Your holographic will cannot be typed, and you cannot have someone else write it out for you. It must be written in your own hand. Then, all you have to do is to sign and date it. Witnesses are not required, but they never hurt. Here's an example of a holographic will:

I, John Smith, declare this to be my last will and testament. I am married to Mary Smith, and I have two children, Joe Smith and Marlene Brown. Upon my death, my estate shall go to my wife. If she dies before me, my estate will go to my children, in equal shares. I nominate my wife Mary Smith as executor of this will, to serve without bond. If she refuses or fails to serve as my executor, I appoint my daughter, Marlene Brown, as executor of this will, to serve without bond.

-s-John SmithAugust 15, 2005

If you write your own will, you are taking your estate into your own hands. Think of it as performing surgery on yourself. Do not do this unless you are absolutely sure you know what you are doing, and always with the understanding that you may be making mistakes that could result in your estate passing to someone other than who you want. Also, while valid in California, HOLOGRAPHIC WILLS ARE NOT LEGAL IN ALL STATES, SO CHECK TWICE BEFORE YOU DO ONE.

Joint Tenancy, Life Tenancy, and Beneficiary Designations: These fall under the category of "Poor Man's Probate Avoidance". Your probate estate consists only of your property titled solely in your own name, in a tenancy in common, or titled as community property. Your other assets, such as joint tenancy property, property held in life tenancy, and accounts with "in trust for" or other beneficiary designations, including IRA's and insurance policies, will pass to your heirs outside of your probate estate.

This works really well, and has the advantage that it costs nothing for you to set up, except maybe for a couple of deeds for your home. But before you go putting your children's names on your property, you should first consider the drawbacks. First, you can't take your children's names off of your property without their permission. Suppose you decide that your loving son is actually no good at all, and you decide to leave your home to your grandchildren instead. Well, if your son is on the deed to the home, you are going to have to convince him to sign a deed giving it back to you. Good luck.

Also, if your child goes bankrupt, or causes a major accident that his or her insurance does not cover, then it is possible that your child's creditors will come after your property. While you can prove that the property is really yours, so long as your child did not contribute to it, doing this may cost you money and will tie up your property while these difficulties are resolved.

Trusts: Revocable Trusts, also known as "inter vivos trusts" or "revocable living trusts", also work to avoid probate. In a nutshell, they work because the creators, or "settlers" of the trust transfer their property to the trustees. Then, the trustees of the trust manage the property for the benefit of the trust's beneficiaries. Usually, the settlers are the initial trustees of the trust. When the settler-trustees resign, pass away, or become incapacitated, the successor trustees named within the trust document take over and run things.

There are, in general, three types of trusts.

One-Settler Trusts: This is a trust made by just one person, as settler and initial trustee. Upon the death of the settler, the successor trustee pays the bills, does the taxes, and divides the trust's assets in the manner the trust provides.

Two-Settler Simple Trusts: This trust is made usually by a husband and wife. When one spouse dies, the entire trust continues in existence for the surviving spouse, and the surviving spouse retains the power to amend the entire trust. This kind of trust is not designed to protect assets from estate taxes, but it does avoid probate.

Two-Settler A/B Trusts: If a married couple own property together that is worth more than the amount that will pass free of federal estate tax, then they should consider an A/B trust. Here's the estate tax limits under current federal law:

Year of DeathEstate Tax Unified Credit Exclusion Equivalent

2004 and 2005 $1,500,000

2006, 2007, & 2008 $2,000,000

2009 $3,500,000

2010 Unlimited - Estate Tax is Repealed

2011 $1,000,000 - Estate Tax Reform expires

The way these trusts work is that when the first spouse dies, the trust is divided into three shares.

The first trust, containing all of the surviving spouse's property, is usually called the "A" or "Survivor's" Trust. The deceased spouse's property (his or her half separate property and half of the community property), is then split into one or two trusts. One trust, is called the "B" or "Credit Shelter" or "Bypass" Trust. This trust holds the portion of the deceased spouse's property that can pass free of estate tax. If there is anything left over, a third trust may be created, called the "C" or "Marital Deduction" or "QTIP" Trust, or sometimes the extra assets go to the surviving spouse in the "A" Trust.

The result of this is that for a married couple there will be no estate tax on the first death. On the second death, the amount of estate tax due will be minimized or even eliminated because the assets of the "B" Trust are not subject to estate tax on the surviving spouse's death.

Do you need a Revocable Trust? If you own a home, then you should at least consider getting a trust. A modest estate valued at $300,000 is subject to statutory probate attorney and executor fees in the amount of $9,000 each, for a total of $18,000. Also, because probate can take anywhere from one year to three years to complete, getting a trust to avoid probate is, for most homeowners, a very good idea.

Charitable Remainder Trusts: If an A/B trust is not enough to shelter your assets from federal estate tax, then a Charitable Remainder Trust is another alternative. Essentially, money is gifted into an irrevocable trust that pays out a certain amount of income to the trust beneficiaries over a period of time, based on an annuity payout schedule. After these payments are made, the rest of the charitable trust's assets, the "remainder", is given to selected charitable beneficiaries. Many charitable organizations encourage these trusts, and some of them will even pay the legal fees for setting them up. If you intend to donate to charity, a Charitable Remainder Trust can help you take full benefit of the income and estate tax advantages of your gift.

Irrevocable Insurance Trusts: This is a specialized form of irrevocable trust that is designed to purchase and maintain insurance polices on the lives of the settlers. After the settlers die, the insurance policies will pay off, but the proceeds will not be subject to federal estate tax.

Irrevocable Trusts for Medi-Cal Planning:

Assets owned by recipients of Medi-Cal benefits are generally subject to estate recovery claims from the California Department of Health Services after the death of the Medi-Cal recipient and any surviving spouse. Specialized irrevocable trusts are a means of sheltering a Medi-Cal recipient's home from Medi-Cal estate claims. These trusts minimize the settlor's rights with respect to the trust in order to avoid the Medi-Cal claim but also include language causing the trust to be subject to federal estate tax on the death of the settlor, thereby preserving the step-up in cost basis and saving the beneficiaries capital gains tax if the home is sold upon the settlor's death.

Family Limited Partnerships:

This is an advanced form of estate planning that can allow families to significantly reduce or even eliminate their estate tax liability by creating a partnership with their children that benefits from federal gift and estate tax valuation discounts.